By Brendan Conway

Just how long can the Herbalife (HLF) hedge-fund drama continue? Janney Capital Markets analysts John San Marco and Amy Babington argue this morning that it’s going to be too long to recommending buying the stock.

The pair, who set a $44 price target and rate the stock “neutral,” contend in a client note that “the point of maximum uncertainty [is] likely still in front of us.” They argue that even though the health-products company gave what they call a “very solid” defense Thursday against Pershing Square Capital Management chief Bill Ackman’s pyramid-scheme claims, that investors will continue to be perturbed, and the hedge-fund shorts will continue to press hard.

Bloomberg

No exit?

If Herbalife stays public — and CEO Michael O. Johnson pledged yesterday that it would — then the pair see an exit only through major changes to the business, or regulatory action:

[W]e expect the forceful opposition, constant public scrutiny, and the resultant volatility will only be stemmed by: 1) business model adjustments that are significant enough (liberalizing return policy further, liberalizing club operating policies, lowering S&H to market rates, proactively finding/removing purchase-based distributors such as Anthony Powell), or 2) regulator proceedings such as a formal FTC/SEC investigation (but even this has historically provided investors only temporary confidence in the model). Market participants have exhaustively, since May, been hyper-focused on what constitutes an “illegal pyramid scheme” – yet the absence of “bright line” regulations has never been more poignant than it has been the past three weeks.

Enough, in in their view, to force investors to look elsewhere.

Pershing, meanwhile, most recently vowed to keep pressing its case that the stock should fall to zero, including by introducing unspecified new lines of argument against the company.

In a contrast to Janney’s analysts, D.A. Davidson analyst Timothy S. Ramey seems to think the die is cast in Herbalife’s favor, and decisively so.

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There are 11 comments

JANUARY 11, 2013 9:30 A.M.

Mike wrote:

You've got to be kidding me. The Rube Goldberg compensation plan specifically designed to ensure 95% of the population would get a headache and give up trying to figure it out proves the exact opposite of the analyst's "Justice Potter" test. Everything about HLF smacks of a pyramid scheme and Ackman did an excellent job detailing how it specifically qualifies as a pyramid scheme under a couple of the FTC's definitions. It's pretty telling that the analyst you cite doesn't try to attack Ackman's specific arguments but tries to dismiss everything out of hand.

JANUARY 11, 2013 10:09 A.M.

Mike R wrote:

MLM is a 100 year old industry All the bad players are easily found out and eliminated by AG's in 50 states The FCC Ect. Ect. Ackman loses

thought it was supposed to be a serious, numbers based defense of thie company, but nooooooooooo! this scam presentation was planned 3 weeks in advance but the scam 90 million dollar a year had to get "'catch a plane" to go " go see some "distributers" aka co-CONspirators om the west coast", the reason he have to leave the question part of this scam presentation right after the planted questioners were done throwing softball "questions".

such a seazy scam company will not last, but i wouldn't short it til the big boys duke it out. it WILL eventually go to zero, though...

JANUARY 11, 2013 10:42 A.M.

CC wrote:

Sometimes its easier just to lopk at the facts not the hyperbole.. So, here they are, but you may not like it. Herbalife has been operating the same way for 32 years. It's in something like 80 countries. There are no AG's attempting to shut down Herbalife on the state level.. The FTC has investigated Herbalife and cleared them.. They operate essentially the same way as all ppwerful MLMs.. I'm trying to figure out how one guy thinks he has a chance to shut them down. Especially if the majority of their sales are now non US sales.. I'd run from this short..

For clarification. I'm not short, I'm not long. I'm just an attorney fascinated by this whole amazing fight.. I'm thinking of going long though..

JANUARY 11, 2013 11:09 A.M.

Mike wrote:

CC, we have laws in this country that don't get enforced even though everyone knows they are regularly violated. Immigration for example. 32 years in existence doesn't prove anything. Ackman does an excellent job showing that HLF qualifies as an illegal pyramid scheme under a couple of the FTC's guidlines for spotting an illegal pyramid scheme. In particular HL tries to redefine compensation that is clearly a reward for recruiting new dupes as a cost of doing business and they intentionally don't keep track of who buys the end products because they know it's the distributors and not customers outside the network and this would make them an illegal pyramid scheme. Ackman doesn't even need the FTC to get their heads out of their arses, all he has to do is shame Congress into requiring MLM's to keep track and disclose who actually buys their end products to shut them down.

JANUARY 11, 2013 11:20 A.M.

CC wrote:

Mike, that is fine and dandy.. But someone needs to explain to me how this is going to hurt their stock..?? When the FTC requires them to recategorize entry level distributors as clients with a discount and a more liberal return policy (which their current one seems better than industry standard, at least better than Costco - they wouldn't return my membership fee when I found out my firm offered them) and they make those adjustments, how does that affect their billion dollar sales industries.. Our country doesn't usually engage in the shutting down of old public ally traded companies.. But hey, go real short in a big big way.. Drive down the price again to $25 so that I can jump in on the action..

JANUARY 11, 2013 11:40 A.M.

CC wrote:

Mike, let me guess... You're short and got caught with your pants down? Think coldly about this one. I'd bail before the short squeeze sets in. If HLF announces a significant by back in the next couple of weeks, it could be lights out for the shorters..

JANUARY 11, 2013 12:19 P.M.

Mike wrote:

.I don’t do shorts except in a stock picking competition so nice try to change the subject but it won’t work. The argument against HLF has nothing to do with their financials so why would anyone short HLF care that they bought back stock. In fact to my understanding they already have a buy back plan approved. How about addressing Ackman’s arguments about HLF trying to say compensation that is clearly rewarding recruiting isn’t a recruiting reward but a cost of doing business? How about his argument that they don’t keep track of who actually buys the products because it would show the overwhellming majority of the products was purchased by the dupes and hardly any sold outside the dupe network? Ackman points out that the dupes are required to keep sales receipts but HLF doesn’t bother to collect and keep track of them. It would only take the FTC or Congress telling them to start collecting and reporting them to shut HLF down. How about addressing these points Mr. Lawyer.

BTW if you watched Ackman's presentation you would know that they handle the return issue by using the CYA form the dupes have to fill out to qualify for dupe points that's actually designed to protect HLF by having the dupes certify they sold at least 70% of their product outside the network to keep them from being able to return the product even though they have a return policy.

JANUARY 11, 2013 3:07 P.M.

Jack Herbalife wrote:

I have been an HLF distributor for 25yrs I thank God for companies like HLF to give average people a chance to become above average. Simple because when you are give a product like HLF food and you see what happens to a large percentage of people who eat it WOW! Then you see there is a big opportunity to help so many people. And like my Mentor the late Jim Rohn said to me " if you can help enough other people get what they want you will get want you want and deserve ever penny. HLF has paid me lot of penny's as a direct result to my life long commitment dedication sweat an tears over the last 25 plus years. For any one to attack me and my business and try to make me look bad and my products and services you can count on one thing from me and soooo many of my working partners we will work twice as hard sell twice as much and make even a bigger impact on the health of this sick world. I am HLF I live and breathe it because I personally have saved lives and helped to make people's lives better. Evil is everywhere and it's not only bad evil which we all understand its good evil people who claim to be good smart but are as evil as they come. Monsters who only care about money and do a right thing in a wrong way or a wrong thing in a wrong way which I always wrong.

JANUARY 14, 2013 8:57 A.M.

Robert wrote:

I have been 25 years in the company and no none would keep buying the products if they did bot like them all this rubbish abbot this and that the fundamentals are good because the product is excellent .As someone rightly said all business or even religions have pyramid structure hlf is pure free Enterprise those who do the work get the pay
hence some people below me have made much more money than me because they worked much harder !
I have people using the products for 25 years and the company has kept all its promises and Integrity for 32 years while helping people to improve their health, a I lost 45 pounds and more importantly kept it off Ackman argument that here are no retail sales is pathetic he should go to Mexico Brazil Russia India or Korea old markets where the whole system is purely retail also I HAVE NOT ONE PERSON BUY BACK IN 25 YEARS in fact the company has terminated some of my unethical distributors and I fully support they teach the founders Mark Hughes story at Harvard business school he was a visionary talking about the importantance of good nutrton 32 years ago US need more visionary people like him not Ackman
who At a panel meeting discussing Bernie Madoff in January 2009, Ackman defended his long time friend J. Ezra Merkin stating, "Has Ezra committed a crime? I don’t think so,” "I think [Merkin] is an honest person, an intelligent person, an interesting person, a smart investor."[12][13][14] On April 6, 2009, Merkin was charged with civil fraud by the State of New York, for "secretly steering $2.4 billion in client money into Bernard Madoff's Ponzi fraud without their permission."
LONG ON HLF AT $31

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